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Presentation on
Holding & Subsidiary Company
Presented By :-
´
- Holding Company ² A Brief Introduction
When a company acquires all or majority (50% & above) of the Equity Shares or
voting right of a company, the company acquiring the shares is known as the Holding
company ; the company whose shares have been acquired is known as the Subsidiary
company of the holding company. The subsidiary company continues to operate as before ,
the only difference being that the holding company now has the majority of shareholding.
The relationship between a holding company and subsidiary company is basically one of
control.
The advantages of acquiring control through this method is two-folds ² Financial
and Managerial. A holding company can control large properties of a subsidiary with a
minimum of investment and it can avail income tax benefits. Managerially , it is possible
to decentralise operation with full responsibility and accountability to the subsidiary.
- cegal Framework -
Section 4 of the Companies Act, 1956 states that a company shall, be deemed to be a
subsidiary of another if, but only if
(a) that other controls the composition of its Board of Directors ; or
(b) that other
(i) where the first-mentioned company is an existing company in respect of which the
holders of preference shares issues before the commencement of this Act have the same
voting rights in all respect as the holders of equity shares, exercises or controls more
than half of the total voting power of such company;
(ii) where the first-mentioned company is any other company, holds more than half in
nominal value of its equity share capital ;
(c) where the first-mentioned company is a subsidiary of any company which is that
other·s subsidiary.
Important Points to be noted while preparing the financial statement of a Holding Company with its
Subsidiary :-
Though the preparation of Consolidated Balance Sheet is not compulsory in India but it is often
asked to prepare the same. In this circumstances the followings factors to be taken into
consideration :
1) Note the date of acquisition of shares of Subsidiary Company by a Holding Company. Profit/coss
up to the date of acquisition is called Pre-acquisition Profit/coss whereas Profit/coss from the
date of acquisition up to date of Balance Sheet is called Post-acquisition Profit/coss.
2) As the majority of shares are acquired by Holding Company, the total claim of minority
shareholders is ascertained for which Statement of Calculation of Minority Interest is prepared.
Except Share Capital, Reserves and Surplus and sometimes Debentures(if some part of it held by
Holding Company), all other assets and liabilities of Subsidiary Company are shown in Consolidated
Balance Sheet by adding the figures of both Holding and Subsidiary Company of a particular asset or
liability .
- Steps to be taken into consideration while preparing Consolidated Balance Sheet :
The following are the Summarised Balance Sheets of Honda ltd. and its subsidiary Toyota ltd. As at 31st March,
2008 :-
LIABILITIES Honda Ltd Toyota ltd ASSETS Honda Ltd Toyota ltd
Amount(Rs) Amount(Rs) Amount(Rs) Amount(Rs)
(a) Honda ctd acquired shares of Toyota ctd on 1st April, 2007 when the balances on the Profit
and coss A/c and General Reserve of Toyota ctd were Rs. 33,000 and Rs. 4,500 respectively.
(b) Sundry Creditors of Rs. 20,000 in the books of Honda ctd on 31st March,2008 included a
sum of Rs. 12,000 payable to Toyota ctd for credit purchases on which the latter company made
a profit of Rs. 3,000 in 2007-08.
(c) In June, 2007, Toyota ctd paid a dividend of 12% in respect of 2006-07.
(d) Stock of Rs. 51,000 of Honda ctd included unsold goods purchased from Toyota ltd at a cost
of Rs. 9,000.
Solution :
It is important to note that holding-subsidiary relationship is established only on 1st April ,2007 and not
before that. The relationship is maintained till 31st March 2008. Hence we prepare consolidated Balance
Sheet as on 31st March, 2008. Here the minority interest in Toyota ctd. is 1/3rd or 33.33%.
- Note 2)
Calculation of Pre-acquisition Profit/Loss
Particulars Amount(Rs)
Total 40,500.00
Goodwill 21,000.00
- Note 6) Consolidated Profit & Loss A/c of Honda ltd
17,000.00
(12000-9000)/12000*9000 2,250.00
Sundry Debtors :
Honda ltd 48,500.00
Toyota Ltd 41,100.00
89,600.00
less : Mutual Indebtness 12,000.00
77,600.00
Consolidated Balance sheet of Honda ltd with Toyota ltd as at 31st March, 2008 :
LIABILITIES ASSETS
Amount(Rs) Amount(Rs) Amount(Rs) Amount(Rs)
Share Capital : Buildings :
Share of Rs. 10 each 200,000.00 Honda ltd 110,000.00
General Reserves 105,000.00 Toyota ltd 44,500.00 154,500.00
Profit & Loss A/c (Note 6) 89,750.00 Machienry :
Proposed Dividend : Honda ltd 57,500.00
Honda ltd 20,000.00 Toyota ltd 16,000.00 73,500.00
Toyota ltd 7,500.00 Furniture :